Commercial Paper Market Shrinking at a Record Pace

The commercial paper market [CP], the cheapest source of corporate cash, has been under considerable strain in recent weeks as cash and credit continue to be extremely tight. That’s not to say companies are not conducting successful debt negotiations, they are. However, most of them still face higher borrowing costs despite record low Libor rates.

According to data released by the Fed Thursday, the U.S. commercial paper market resumed shrinking this week, falling by $39.7 billion in the week ended July 15.

The U.S. commercial paper market…is shrinking at a record pace, raising the cost of capital for borrowers from Consolidated Edison Inc. to Kellogg Co.

The market for company debt due within nine months has plunged 28 percent since April 8 to $1.1 trillion, its longest and deepest slump, Federal Reserve data show. Investor demand for all but top-rated commercial paper, or CP, evaporated after September’s collapse of the $62.5 billion Reserve Primary Fund sparked a run on money-market accounts, and as the recession sapped companies’ need for short-term credit to expand.

Proposals from the U.S. Securities and Exchange Commission in June may worsen the slump by restricting money-market funds, which hold 40 percent of the paper, to only top-rated debt. That would force more companies to sell bonds that may cost an extra 8 percentage points in interest, or $8 million a year for every $100 million borrowed.
…
Commercial paper outstanding fell $39.7 billion, or 3.5 percent, during the week ended yesterday, its 14th straight decline, the Fed said today. At $1.097 trillion, the CP market is less than half its peak of $2.22 trillion in July 2007, with about 10 percent of it owned by the Fed, central bank data show.

The market for second-tier CP also has also shrunk by almost half to $44.1 billion since August 2007, with daily issuance down to $2.66 billion in June, the least in more than a decade and a third of what was sold a year earlier, Fed data show.

The Tier 2 CP market is approx. $​80 bln in size and includes companies such as FedEx Corporation (FDX), Kraft Foods Inc. (KFT) , Time Warner Inc. (TWX), etc. If the pace of deterioration continues, the Fed will probably be forced to extend its CPF facility (set up by the Fed to extend short-term financing to U.S. co.’s that had been shut out of the CP market) to Tier 2 CP issuers as well.